a) Suppose that the US is currently in a balance of payments equilibrium and receives shocks that reduce both Y1 and Y2 by 3%. In the intertemporal model, the US balance of payments moves into _________ and world prices P* _______.

deficit, rise

surplus, rise

does not change, rise

deficit, fall

b) In the gold standard model, two large economies have negative correlation in their business cycles. D sustains a 1% increase in output in Y1, and 2% decrease in Y2. F has the opposite, output decreasing by 2% for Y1, and increasing by 1% for Y2. Under flexible exchange rates, the domestic currency should ___________:

appreciate by 6%

appreciate by 3%

depreciate by 6%

depreciate by 2%